When a customer presents a credit card to make a purchase from a merchant, a series of various actions:                Merchant authorizes credit card        Merchant requests payment from card issuer        Card issuer settles with merchant        Customer pays bill to card issuer        
FIG. 1 illustrates these steps. First, the purchase is authorized. The customer 101 presents a credit card to the merchant 102, where a computer terminal reads the information encoded in the magnetic stripe on the back of the card, and a clerk inputs the amount of the purchase. This information is then forwarded to the merchant processor 103 (or acquiring bank 104 acting as a merchant processor) who is an agent of the acquiring bank 104 and forwards the request for approval through the card association network 105, to an issuer's processor 106 who is an agent of the card issuing bank 107. The issuer's processor 106 approves or denies the request based on the decision of the card issuing bank 107, and passes the decision back along the chain to the merchant 102.
Specific details of the above may vary. For example, the customer 101 may provide the cardholder and order information to the merchant 102 by way of a mailed-in order form, a telephone call, or a web page. Or the merchant processor 103 may also be an acquiring bank 104 holding transaction accounts with merchant funds and the authority to transfer funds in and out of those accounts on behalf of the merchant 102. Or the merchant processor 103 and acquiring hank 104 may be separate entities. Similarly, the issuer's processor 106 and card issuing bank 107 may be separate entities as shown in FIG. 1, or a given card issuer may act as its own issuer's processor.
For an approved sale, the merchant 102 captures and records transaction data characterizing the purchase. At one or more times during each business day, the merchant 102 sends to the merchant processor 103 the sales data for that full or partial day, and the merchant processor 103 in turn submits the sales data into the card association network 105. The card association network 105 forwards the sales data to the issuer's processor 106 acting on behalf of the card issuing bank 107. The issuer's processor 106 or issuing bank 107 in turn can post the charges to the customer's credit card account for payment back to the card issuing bank 107 during the next monthly statement cycle.
The issuer's processor 106 acting on behalf of the card issuing bank 107 returns electronic payment for the purchase (deducting interchange fees) back through the card association network 105. The card association network 105 directs this payment (deducting association fees) back to the acquiring bank 104/merchant processor 103 for deposit into the merchant's account (deducting the merchant processor fee). Further background material regarding these processes is provided in Merchant Processing—Comptroller's Handbook, Comptroller of the Currency, Administrator of National Banks, December 2001, the contents of which are incorporated herein by reference.
For a credit card sale, each of the parties described above plays important role. But significant challenges arise to implement computer systems and software that coordinate the competing requirements of the multiple parties. Coordinating these complex processes requires efficient utilization of available computational and systemic resources.
Occasionally, a customer may dispute a specific charge. This may arise due to failure to receive the merchandise, inferior merchandise, an unauthorized transaction, etc. Under the rules of the card issuing organizations (Visa, MasterCard, etc.), the customer is supposed to contact the merchant first to attempt to resolve the dispute, for example, by issuing a refund for all or part of the sale price.
With reference to FIG. 1, the merchant 102 does not need any authorization from the card issuing bank 107 to make a refund. The merchant 102 simply sends the refund data to the merchant processor 103, who forwards the refund data over the card association network 105 to the issuer's processor 106 on behalf of the card issuing bank 107. The card issuing bank 107/issuer's processor 106 credits the customer's credit card account for the refund during the next monthly statement cycle. And the issuer's processor 106 acting on behalf of the card issuing bank 107 collects payment for the refund in the form of an offset (returning an approximation of the interchange fee) back through the card association network 105. The card association network 105 directs the refund offset back to the acquiring bank 104 (adding in the association feed) and the merchant processor 103 for payment from the merchant's account (adding the merchant processor fee).
But the above refund process is not optimal from the customer's perspective. One problem is that of having to contact the individual merchant for a given purchase may be difficult. The customer has to contact that particular merchant about the problem and then wade through an unfamiliar process that varies from merchant to merchant. Furthermore, the consumer may not be able to get a refund from the merchant, due to a number of issues. This can be a frustrating and time consuming process.
Rather than following this refund process, many customer cardholders simply contact the customer account issuing bank and complain. Also, a customer may not understand credit card issuer or association advertising correctly and think that they are supposed to contact the issuing bank directly. This usually results in the customer account issuing bank submitting what is known as a “chargeback” against the merchant for the amount of the transaction. Whereas a refund is issued by the merchant, a chargeback is issued by the card issuing bank.
In a typical chargeback process, the customer 101 contacts the card issuing bank 107 requesting a credit to address a charge problem. The issuer's processor 106 can act on behalf of the card issuing bank 107 to issue a credit to the customer's credit card account. The issuer's processor 106/issuing bank 107 also creates a chargeback transaction as an offset for the chargeback amount (plus interchange fee) back through the card association network 105. The card association network 105 directs the chargeback offset back to the merchant processor 103/merchant bank 104 for payment from the merchant's account (adding the merchant processor fee). By conditions of the agreement which are required to accept a card association's credit card, the merchant 102 must initially accept such a chargeback, which is counted as a customer service incident by the card association—even if it is reversed. Then the merchant 102 or the merchant processor 103 as agent of the merchant can initiate a dispute resolution process.
Although, at first it might seem that the financial effect on the merchant for a chargeback is the same as for a refund, that is not the whole story. The card issuing associations have many complex rules that can be quite onerous on the merchants. One such rule is that a merchant will be barred from honoring an issuing association's credit cards if chargebacks exceed 1% of the total transactions. Although the rules require that the merchant is supposed to be given an opportunity to resolve a customer dispute before the card issuing bank provides a chargeback, there presently is no mechanism to ensure that the merchant gets that opportunity. Applicant believes that in at least 50% of all chargebacks, the customer never attempted to resolve the problem with the merchant first, and has measured that number to be as high as 90% for some merchants. As explained above, in a chargeback from the card issuing bank, the merchant effectively has no opportunity at all to resolve or dispute the chargeback request. That is not fair to the merchant.